David has a contract to buy 900 metres of cloth each month for $7 per month. From each 3 meters of cloth he can make a dress which he can sell for $30. He also incurs labour costs of $4 per dress. Alternatively he can sell the cloth immediately for $6.25 per meter. If he decides to cancel the cloth purchase contract without notice he must pay cancellation penalty of $700, for each of the next two months.

In December 2009 the market price of dresses fell to $22. He is considering ceasing production since he believes that the market will not improve. There is 2 months notice stated in the contract in case of breach of a contract.

1. Is there a present obligation?

b) What will appear in respect of the contract in Davids financial statements for the year ending 31 December, 2009?